The Architecture Of Irrationality: Behavioural Biases And Sentiment Dynamics In Digital Asset Markets

Abstract

This paper investigates the extent to which cognitive heuristics, social influence, and digitally-mediated sentiment drive the extreme volatility of cryptocurrency, Decentralised Finance (DeFi), and Non-Fungible Token (NFT) markets, and the degree to which these dynamics deviate from the Efficient Market Hypothesis. Using an integrative narrative review and a synthesis of empirical evidence from 2014–2025, the paper develops the Integrated Digital Asset Behavioural Model (IDABM), a four-variable framework relating market stability to social velocity (Sv ), heuristic load (Hl ), platform gamma (Pγ ), and liquidity leverage (Ll ). The analysis draws on demographic and sentiment data, case evidence from the 2022 Terra/ Luna and FTX collapses, and a comparative cross-asset bias taxonomy. The findings indicate that digital asset markets constitute a pure sentiment environment in which the absence of conventional valuation anchors produces heuristic dominance and structurally amplified herding behaviour. The paper concludes that effective regulation must shift from informational disclosure toward behavioural guardrails — including algorithmic accountability, regulation of gamified trading interfaces, and behavioural literacy requirements.